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Old 01-17-2008, 06:50 AM   #21
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Originally Posted by lsbcal View Post
It is an expense. The interest is definitely an expense but not the amount you are paying toward principle. In the last year of your mortgage almost everything is going towards principle ... and then in the next year the expense completely disappears. The mortgage (interest) expense does not go from full mortgage to zero in one year. When the last payment is made you get to call it the last one because you paid back all the principle the bank gave you (plus interest).

Maybe an accountant could do a better job of explaining this.
If you were buying stock or putting it in a 401K, it's not an expense. You can easily use that for income.

If you bought a car or furniture with the money, that would be an expense. A capital expense since you'll still own the asset, but an expense, right?

A house used as your personal residence falls somewhere in between. It appreciates, but you still don't get any income out of it, unless your retirement plan includes eventually selling it. So I consider it a lot more like a car or furniture. I have something to show for it, but it doesn't give me any money. If my back is against the wall, I can downsize or sell it and rent, but that's not my plan.

That's why I consider it a capital expense, and I wouldn't say I could spend more money on other things because of this.

If you tried this through firecalc, how would you account for the cash outflow with the mortgage payment?
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Old 01-17-2008, 07:00 AM   #22
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Originally Posted by RunningBum View Post
If you were buying stock or putting it in a 401K, it's not an expense. You can easily use that for income.

If you bought a car or furniture with the money, that would be an expense. A capital expense since you'll still own the asset, but an expense, right?

A house used as your personal residence falls somewhere in between. It appreciates, but you still don't get any income out of it, unless your retirement plan includes eventually selling it. So I consider it a lot more like a car or furniture. I have something to show for it, but it doesn't give me any money. If my back is against the wall, I can downsize or sell it and rent, but that's not my plan.

That's why I consider it a capital expense, and I wouldn't say I could spend more money on other things because of this.

If you tried this through firecalc, how would you account for the cash outflow with the mortgage payment?
Say you have a 1000 mortgage then have it paid off then the 1000 dollars would be new income.
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Old 01-17-2008, 10:36 AM   #23
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Runningbum, I think what you are missing is that when you take out a mortgage you are giving a piece of your real estate equity to a bank. When you pay it off (the principle) you basicly get it back and you now own the house 100%.

Real estate is considered an asset class in the equities world. Cars, kitchen tables, and other items are not really the same sort of thing. A bank will not generally loan you based on ordinary everyday items like toasters even if you have 1000's of them. But they will make you a home equity loan because the financial world considers real estate to have a marketable value in any normal investment environment. Today the asset may be worth 80% of what it was worth 2 years ago but that does not change the fact that your house is an asset.
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Old 01-17-2008, 10:37 AM   #24
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What planet is your Canada on?

See Housing inflation kicker
or
reportonbusiness.com: Homes in Edmonton, Saskatoon most overvalued
or
The Daily, Thursday, January 10, 2008. New Housing Price Index

Of course we have a housing bubble. It just hasn't popped yet.
I believe that Vancouver and area may be in for some turbulence, and as for the east, I haven't seen any bubble like gains in prices.

If oil, uranium, and natural gas are all in a bubble, then yes, the home prices in Alta and Sask are in a bubble as well. It is the natural resources that are abundant in these places that is causing a rise in prices, not idiotic lending practices. People want to move to Alta and Sask (I can't believe I just typed that) for the very real and lucrative economic advantages that exist by living near the resources and industries. Are there people flipping and building houses on spec? You bet, but so far there is a stream of actual families willing to move into the homes.

I have ridden the Alberta boom 'n bust rollercoaster all of my life. Real estate gains have always been very closely pegged to conventional oil and gas drilling activity. Now there's a new and very big game in town. There are a lot of multi-billion dollar projects planned and going on here presently in the oilsands and the upgraders that the big oil companies have already invested heavily in. Conventional oil and gas drilling is actually very slow here right now and yet the real estate prices have held reasonably steady.

Not everything that rises in price quickly is a bubble.
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Old 01-17-2008, 10:43 AM   #25
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R

Real estate is considered an asset class in the equities world. Cars, kitchen tables, and other items are not really the same sort of thing. A bank will not generally loan you based on ordinary everyday items like toasters even if you have 1000's of them. But they will make you a home equity loan because the financial world considers real estate to have a marketable value in any normal investment environment. Today the asset may be worth 80% of what it was worth 2 years ago but that does not change the fact that your house is an asset.

Yes, but its not a liquid asset. We all need somewhere to live so unless you sell your house and rent somewhere or buy a smaller place how much equity you have in a house is a nice ego massager, but of little practical value other than to let you borrow even more money and I don't see that as a good thing. That's why I bought a 2 family home so that I have an asset that produces income too. My house can make me money in 2 ways, appreciation and $18k a year rent.
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Old 01-17-2008, 11:31 AM   #26
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Runningbum, I think what you are missing is that when you take out a mortgage you are giving a piece of your real estate equity to a bank. When you pay it off (the principle) you basicly get it back and you now own the house 100%.

Real estate is considered an asset class in the equities world. Cars, kitchen tables, and other items are not really the same sort of thing. A bank will not generally loan you based on ordinary everyday items like toasters even if you have 1000's of them. But they will make you a home equity loan because the financial world considers real estate to have a marketable value in any normal investment environment. Today the asset may be worth 80% of what it was worth 2 years ago but that does not change the fact that your house is an asset.
I do understand that, does that mean that you plan to use your personal residence as a source of income in your later years? When you run FireCalc, do you include your personal residence as an asset along with your other investments, that you multiple by 4% to get your withdrawal amount?

If you do, then I agree that means you don't need to treat the principal repayment as an expense, but it does mean that your plan may very well include selling your house or taking a reverse mortgage at some point. Remember that FireCalc considers a plan a success if you reach your target age before all assets are gone, but they might be very close to being drained.

If not, I think you're taking income and putting it away somewhere you don't plan to get to it, so it really is no different from buying a car or a toaster . That means it's no different from saying, "I'll draw 5% for awhile, then I'll drop it to 4% later (when the mortgage is paid off)."

That's why I was suggesting you be careful with this. If you're satisfied that you've figured this in correctly, that's your business. I'd just hate to see someone go ahead and increase their expenses with that notion, and find out in 20 years that they're running out of liquid assets because they withdrew too much in the early years, and have to make an unplanned sale their house.

It's not something I would do. My house is there as an asset to use only in an emergency plan.

Now, if you were only doing a 3% SWR including the mortgage expense because you fear 4% is cutting it too tight, I agree that you could bump your expenses without much fear to 4% including the mortgage, because you do have the house as a safety net.
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Old 01-17-2008, 03:26 PM   #27
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I guess this is a matter of what assumptions one uses in financing retirement and how conservative one chooses to be. I've run a lot of FIRECalc scenarios to arrive at a reasonable compromise for me. Their are a lot of factors that go into how conservative one has been such as (1) your asset allocation, (2) what assets you choose, (3) the house insurance you own, (4) how you maintain your health, etc.

In a wildly worst case scenario I could see dipping into the house for a home equity loan or reverse mortgage or even selling the house and moving to a smaller one. For us the worst case scenario would have to be worse then the Great Depression. FIRECalc also has a provision for a lump sum change to the portfolio but I've never used it as this is too remote a possibility.

But if I did need to tap the house equity certainly the loan's principle amount would enter into how much was available. I don't think I'd get much for my toaster although it's a very nice model .
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Old 01-17-2008, 05:49 PM   #28
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Runningbum, I think what you are missing is that when you take out a mortgage you are giving a piece of your real estate equity to a bank. When you pay it off (the principle) you basicly get it back and you now own the house 100%.

Real estate is considered an asset class in the equities world. Cars, kitchen tables, and other items are not really the same sort of thing. A bank will not generally loan you based on ordinary everyday items like toasters even if you have 1000's of them. But they will make you a home equity loan because the financial world considers real estate to have a marketable value in any normal investment environment. Today the asset may be worth 80% of what it was worth 2 years ago but that does not change the fact that your house is an asset.


i must have said it 50 times on these boards. the home you live in is a consumption item like fine art on your walls or the jewelry you wear, until the day comes you sell it.

as long as you live in your home it makes no real difference if its worth a million dollars or 100,000. maybe for a loan or estate taxes it counts but basically its a moot point. its as much a moot point as subtracting off your net worth all your future rent payments if you didnt own a home.


if you live in your house until you die its all irrelevant
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Old 01-17-2008, 05:58 PM   #29
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If you tried this through firecalc, how would you account for the cash outflow with the mortgage payment?
How are you proposing he model it with FIREcalc?

FIREcalc doesn't understand anything about amortization, so there's no way to tell it "this part goes for interest" and "this part comes back to me as principal."

Also, FIREcalc assumes that your expenses go up with inflation. Of course, mortgage payments don't go up with inflation. So, if you want to model a mortgage payment in FIREcalc, be sure to use the "off chart spending" and uncheck "inflation adj."

Most people seem to get this wrong, which is why they wrongly assume that a mortgage lowers your SWR.
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